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Calculating Payback Parity For Replacement Gilts

Article-Calculating Payback Parity For Replacement Gilts

The run up in feed costs has impacted the profitability of hog operations in a number of ways. One of the relative costs often overlooked is the cost of raising replacement gilts and the associated breakeven as it relates to the market price of newly weaned pigs or market hogs. Whether producers raise

The run up in feed costs has impacted the profitability of hog operations in a number of ways. One of the relative costs often overlooked is the cost of raising replacement gilts and the associated breakeven as it relates to the market price of newly weaned pigs or market hogs.

Whether producers raise their own replacement gilts or rely on a seedstock supplier, these fluctuating costs must be covered if all segments of the industry are to thrive. Disproportionally high sow culling and mortality rates can be costly.

To examine the effects of input costs and the market price needed to reach reasonable breakeven sow parities, we used three different feed price levels. With the assistance of colleagues at Kansas State University (KSU), we established the “current” feed cost, the “high” feed cost (experienced last summer) and a “midpoint” or “fall” feed cost (set between the current and high averages). KSU feed costs were utilized since the spreadsheet used to calculate the breakeven parity was developed using the KSU phase feeding program and associated feed budgets.

To examine the effects of these values, the average production levels of all herds in the Swine Management Services' (SMS, Freemont, NE) database are highlighted in Table 1. These values include total pigs born, pigs born alive (11.3), and pigs weaned (9.92) per female farrowed.

The production values were used to estimate the market price required for a replacement gilt to attain a positive net present value by Parity 3, when feed costs and market hog prices vary in the range we've experienced across the summer, fall and winter months of 2008. The analysis was carried out using the farrow-to-finish sow longevity calculator available free from Iowa State University Swine Extension at www.ipic.iastate/software.html. This spreadsheet calculates a net present value (NPV), which is explained in the sidebar.

To make the analysis as accurate as possible, number-born-alive-by-parity information is needed to calculate parity adjustment factors for this trait (Table 2). These adjustment factors are used to predict the number of pigs born alive by parity, and to calculate sow feed costs. Preweaning mortality, nursery death loss and grow-finish death loss are subtracted from the number born alive to finally determine the number of pigs sold.

In the examples presented here, grow-finish death loss was increased by 0.5% to account for the number of “slows” and lightweight pigs at the end of the grow-finish period, as those pigs are not full-value pigs.

Table 3 shows the amount of feed consumed by a litter (budgeted by phase), assumed number of pigs per diet phase and feed cost/ton across the three periods (current, fall, summer). This spreadsheet assumes the nursery and grow-finish mortalities occur linearly across the phases; therefore, fewer pigs are fed as phase of production approaches market weights.

Clearly, feed prices reached unprecedented highs last summer, which resulted in nursery-to-finish feed costs of approximately $110/pig marketed ($1,106.31 divided by 10.03 pigs).

As fall approached, feed costs began to decline, dropping the feed cost/pig marketed to just under $92. By mid-December, the current cost/pig marketed had fallen to $61.

In addition to those already mentioned, various production assumptions such as parity discount rate, non-feed costs/litter, cull sow market value, mortality rates at various production phases and for the breeding herd, and a variety of other factors are shown in Table 4.

To arrive at an estimated cost of raising replacement gilts, the feed costs/pig marketed in Table 3 were used and the following values were added:

$35 early weaned pig value;

$20 facility costs ($40/wean-to-finish pig space with two turns/year = $20); and

$80 genetic premium (relatively standard).

It could be argued that the genetic premium per gilt placed in the gilt development unit should be adjusted as feed prices increased because genetic suppliers are also impacted by increased feed costs. Logically, for them to remain in business, the higher costs need to be passed onto their customers. For purposes of this example, the genetic premium was held constant.

Additionally, producers should remember that the barrows produced from maternal line females typically have lower carcass value, convert feed less efficiently and grow slightly slower than the offspring from females bred to terminal sires to maximize market value.

Further, the number of “select” or usable gilts from a litter can vary substantially. Typically, 50-75% of gilts in a litter are selected and moved to the gilt development unit.

Both of these factors can contribute to increased cost of production when internal multiplication programs are used to produce replacement gilts. In this example, these differences were not taken into account, but assumed to be a portion of the $80/gilt premium.

Table 5 reinforces the impact changes in feed costs have on gilts placed in the development unit. Further, the costs of feed during the development phase must also be considered. Finally, assuming that 10% of the gilts placed in the development unit fall out and are sold as market hogs, we can arrive at a value for the replacement gilts that reach the breeding herd.

For example, using current feed costs, the cost to place a gilt in the development unit is $196. Comparatively, when feed costs were high last summer, the cost to place the same replacement gilt was over $245.

As Table 5 shows, the feed costs during the development phases ranged from $28 (current) to $49 (summer). In this example, it is assumed that 90% of gilts entering the development unit actually enter the breeding herd.

The cost to house, vaccinate and attempt to breed also has to be incurred by the gilts that successfully reach the breeding herd. Therefore, the cost of a gilt actually entering the breeding herd is $250, $294 and $322, respectively, for the time periods shown in Table 5. This example illustrates a nearly 30% higher gilt replacement cost due to feed cost alone, when comparing last summer's high to those experienced in December 2008.

Parity Payback

Because of the high feed costs and relatively low price for market hogs occurring since the summer run up in corn price, no matter how long sows remained in the breeding herd, they would not reach profitability. This reinforces what we all know — market price must increase for U.S. pork production to remain viable.

In order to examine this situation from a slightly different angle, we chose to look at the minimum market price resulting in a positive NPV by the third parity at the three different feed cost levels. This essentially establishes a new base market price needed for producers to attain a positive NPV by Parity 3 under current herd productivity levels.

A closer examination of how market hog price impacts a replacement gilt's chances of reaching a positive NPV by Parity 3 is presented in Tables 6A through 6C. These tables will help producers evaluate the likelihood that a particular market price will occur when feed costs rise again. And, it helps illustrate the importance of using marketing tools (contracts, hedging, calls and puts, etc.) to obtain the prices needed to keep their operations profitable.

As we've shown, increased feed costs contribute to increased replacement gilt costs. This, in turn, raises the price received for market hogs sold, substantially, in order that the gilt has a reasonable chance of attaining a positive NPV by Parity 3 (Tables 6A-C).

Under current feed costs and market prices (Table 6A), a replacement gilt can reach a positive NPV by Parity 3 when market hog prices are at approximately $40/cwt., live weight basis.

However, these values were substantially higher with the feed costs experienced in the summer and fall of 2008. When feed prices were at unprecedented levels during the summer, the live weight market price required for a replacement gilt to attain a positive NPV by Parity 3 was $63/cwt., live weight (Table 6C). Similarly, the market value needed for a replacement gilt to attain a positive NPV by Parity 3 during the fall was $54/cwt., live weight basis (Table 6B).

There is great economic benefit for establishing a sow herd that can remain productive for more parities. As Tables 6A-C show, the longer a sow remains in the breeding herd, the greater the NPV. Higher market hog prices combined with more parities per sow increases the economic reward to producers. And, the more productive the sows are — more pigs born alive, hence more pigs or market hogs sold per parity — the greater the NPV available.

Offsetting High Feed Costs

There are really only two ways to help offset higher costs. One is to focus on improving marketing skills — either by lowering the cost of feed or increasing the price received for market hogs.

Contracting or purchasing feed ingredients can help. Similarly, the use of contracts to establish a market price that is tied to feed costs is a powerful tool, particularly when feed costs rise to the levels seen last summer. The various marketing tools — hedging, use of calls and puts, etc. — are ways to reduce risk and attain an acceptable market price for a unit's level of production.

The second option is to improve sow productivity. In other words, produce more pigs with the same amount of inputs. The production levels in Table 1 can serve as an example.

If producers in the top 25% can improve their average number born alive from 11.92 to 12.23 and their number weaned from 10.56 to 10.82 — moving them to the top 10% — the number of pigs marketed would increase from 9.2 to 10.02. Note how this small change in productivity reduces the price required to reach a positive net present value by the 3rd parity by $2/cwt., live weight.

Similar goals can be set for a breed-to-wean operation. While feed costs represent a substantial cost to raise gilts in this setting, there is less opportunity for managing ingredient costs, although contracting and other marketing measures can be beneficial. These producers need to tie the price they receive for the weaned pigs to a cost of production or some formula based on feed costs to improve their opportunities to be profitable.

Higher Feed Costs Likely

Since production of biofuels will likely be mandated by the government in the future, the relatively low corn price we are now experiencing is likely to be short-lived. As the economy improves — and it will over time — the price of oil will again climb and higher gasoline prices will follow.

Since corn is now seen as an energy source, we can expect higher corn prices in the future. The pork industry will have to wrestle with the fact that higher market prices — whether market hogs or weaned pig prices — will require that sows achieve a profitable net present value by Parity 3. This is a goal that must be reached if U.S. pork production is going to be profitable under the current energy policy.